Condemnations have trailed the decision of the House of Representatives to peg benchmark for crude oil in the 2014 budget at $79 per barrel, a clear departure from the $74 per barrel proposed by President Goodluck Jonathan in the 2014-2016 Medium Term Expenditure Framework and Fiscal Strategy Paper, which the National Assembly approved last week.
To avoid delay in the passage of the 2014 budget, President Jonathan was said to have engaged in a wide consultation, including a meeting with the leadership of both chambers of the National Assembly where a consensus on an oil benchmark of $76.5 per barrel was agreed.
The Senate agrees to the benchmark, while the House of Reps is opting for $79 per barrel benchmark. The House, however, will retain the $160 exchange rate for a three year period and agreed that should the projected crude production fall below what was budgeted, funds from the excess crude account should be used to boost the yearly budgets.
However, in a spontaneous reactions at the weekend, critics of the upward review of the oil benchmark price said the decision of members of the lower chamber of the National Assembly will put the country in a very difficult situation should such an optimistic assumption be upheld.
Leading financial experts, in separate interviews with THISDAY at the weekend, said given the reality of oil theft and falling production, growing popularity of shale gas especially in the US, the discovery of oil in many countries in Africa and elsewhere, and the uncertainty of the world economy, the House benchmark is clearly not in the interest of the country’s economic development.
According to the Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane, the world community is at the threshold of a great change in the global oil industry, explaining that what is in the best interest of Nigeria’s economy is proper planning.
Rewane said: “The prudent thing is to plan so that oil benchmark for the budget will be lower. We will fail woefully if we do not plan,” he said.
He described the House of Reps optimism as an illusion of wealth, which he said does not exist.
The financial expert said the instability in the international oil market would make it very necessary for relevant authorities to make adjustment from time to time, but warned that when the adjustment is too much, then it becomes a serious problem.
He argued that oil benchmark should be pegged at $70 barrel while output should be in the region of two million barrels.
Rewane believed that expenditure for 2014 would be higher as a result of the general elections coming up early 2015; a development, he said, has made it extremely necessary for government to opt for a more realistic oil benchmark.
Former Chairman, Renaissance Capital Group, Rotimi Oyekanmi, said attention should rather be focused on the volume of production and international price.
According to him, it is easy to plan with product output, which he said is under our control, dismissing the fear that oil production in other part of Africa could pose problem.
Oyekanmi, who was also a former Group Head, Ecobank Capital Nigeria, said one of the questions we should ask is if Nigeria will be able to hit the number allocated to the country by the Organisation of Petroleum Exporting Countries (OPEC).
However, Head, Research & Investment Advisory, Sterling Capital Markets Limited, Mr. Sewa Wusu, said there was the need to exercise caution and restraint in the face of recent global developments.
“The only major concern is the risk of oil price shock and volatility. The House of Rep’s proposal of $79 per barrel may have been premised on an optimistic outlook for global oil prices, which may not be sustainable given the whims and caprices of demand and price fluctuations coupled with the current developments in the global economy.
There are indeed possibilities of instabilities in global oil demand, due to anticipated slow growth in the Eurozone, the US, China and India.
“Global growth forecast for all these countries and region were recently cut down by the IMF and World Bank. So these external factors should be considered by the House of Reps before raising the oil price benchmark. The run rate of the current 2013 budget has been affected by revenue shortfall to implement some key projects,” he said.
Wusu said further: “The National Assembly has to be more conservative in fixing the oil price benchmark at this time. This will enable the country to raise savings and beef up our Excess Crude Account, which is currently at $3.9billion from about $10 billion at the beginning of the year. So in times like this, we need fiscal prudence in our budget assumptions and projections.
“OPEC in its recent report alerted that shale oil production would have significant impact on crude oil production in the near term, which has implications for oil earnings for member countries including Nigeria,” he said.
Head, Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, said: “The fears that a high benchmark oil price may hurt the economy are very justifiable. The performance of the economy in terms of revenue generation in 2013 and the downward review of global economic outlook for 2014 provide support for the fears. The declining oil output due to theft and pipeline vandalism, in addition to the discovery of oil in many countries and the fall in US demand for African oil also support the argument for conservatism in choosing oil benchmark for the budget. In 2012, due mainly to shale oil fracking revolution, the US oil production increased 21% while oil exports from African nations – Nigeria, Algeria, Angola and Libya fell by 41%.
“Based on the aforementioned and the forecast by US Energy Information Agency (EIA) that the US oil import would decline, it was predicted that the US may stop importing West African light sweet crude into the Gulf by the second quarter of 2013.
“It is important that the mistakes of non-agreement on the level of conservatism required in the assumptions between the executive and the legislative arm be avoided in the 2014 budget and budgetary process. The outlook for oil production and prices remains challenging despite its robust performance at the international market thus far in 2013,” Ademola said.